Kitco News Weekly Outlook: How Gold Prices Got Their Groove Back - Hint, It's The U.S. Dollar
(Kitco News)- As the old trading saying goes: “The trend is yourfriend,” and some analysts think that gold will continue to trend higher on theback of a weaker U.S. dollar during the shortened trading week.
The gold market found new momentum last week as the U.S.dollar was unable to break above key resistance levels and eventually pushed toa new three-year low early Friday. According to analysts, this has been themost significant factor for gold, which is seeing its best weekly percentagegain in nearly a year.
April gold futures last traded at $1,355.80 an ounce, up 3%from last week is seeing its best percentage gain in two years.
Gold’s gains come as the U.S. dollar was down more than2% at one point in the past week. The U.S. dollar has been unable to find anytraction among investors and traders despite the fact that U.S. 10-year bondyields pushed to a four-year high.
“There has been a breakdown in yields support for the U.S.dollar and that is a signal that the market can go lower,” said Neil Mellor,senior currency strategist for BNY Mellon. “You have to like gold in thisenvironment.”
Silver is also garnering a lot of attention; however, itis mostly negative as many investors are wondering why silver is notoutperforming gold. Silver has lagged behind the yellow metal as thegold/silver ratio holds near a multi-year high above 80 points. The historicalaverage for the ratio is around 60 points.
March silver futures last traded at $16.735 an ounce, up morethan 3% since last week. Silver is seeing its biggest percentage gain sincelate December. The market is struggling to break critical near-term resistanceat $17 an ounce.
However, despite its lackluster performance compared togold, many analysts are not giving up on the grey metal as they see value inthe marketplace.
“There is plenty of upside potential for silver becauseof positive market fundamentals and not only will it catch up to gold but weexpect it to outperform this year,” said Maxwell Gold, Director of InvestmentStrategy and Research at ETF Securities.
Gold added that silver should also benefit from a weakerU.S. dollar environment.
What Is DrivingU.S. Dollar Weakness
Mellor said that they have seen bearish sentiment in theU.S. dollar pick up since the U.S. Congress passed historic tax cuts in lateDecember. Mellor added that the threat of the U.S. deficit growing by $1.5trillion over 10 years because of the tax cuts continues to weigh the currencymarket.
“For the U.S. dollar, the worry is where all thisspending is going. And of course, there is now a rising threat of stagflationas inflation rises and the economy slows,” he said.
But not only is the greenback dealing with domesticissues, but it also has to compete in a global market that is showing definitesigns of growth.
Jameel Ahmad, global head of currency strategy and marketresearch at FXTM, said in an email comment to Kitco News that investors arefocusing on ongoing growth in regions like Europe, which could lead toaggressive central bank monetary policy action.
“The distance in economic recovery between the UnitedStates and developed economies has been narrowing for some time, but it has nowcome to the attention of traders that it is only a matter of time before othermajor central banks prepare the financial markets for their own adjustments toincrease interest rates,” he said in an email to Kitco News. “It is quite clearthat the market remains negative on the dollar. As long as the market remainsnegative on the USD, gold can continue to advance higher.”
However, not all analysts see the potential for gold inthe near-term. Colin Cieszynski, chief market strategist at SIA WealthManagement, said that the U.S. dollar’s weakness is a little overdone, as wellas gold, is slightly overbought.
While Cieszynski is bearish on the dollar and bullish ongold in the near-term, he does think there is potential for the markets’ trendto reverse in the short-term.
“Technically, we are getting to the top of the range ingold, and the market is running out of momentum,” he said.
Gold Can Fight 3%Yields
But it’s not just the U.S. dollar that gold investors arewatching; commodity analysts also say they are keeping an eye on bond yields asthe 10-year bond yield reached a four-year high this week. Traditionally,higher bond yields are negative for gold because it increases the preciousmetal’s opportunity costs.
While a weaker U.S. dollar has helped gold withstandhigher bond yields, Ronald-Peter Stoeferle, fund manager at Incrementum AG andauthor of the annual In Gold We Trust report, said that rising inflationexpectations are also playing an important role.
He noted that although interest rates are up, inflationexpectations are also increasing, which means real yields remain low and couldeven push into negative territory. He added that with rising stagflation fears,the Federal Reserve could be reluctant to increase interest rates more thanthree times this year, which could put the central bank behind the inflationcurve.
“We are very late in the growth cycle and I think thereis a concern that rate hikes will be over sooner than people think. This willcontinue to weigh on the U.S. dollar and keep bond yields low,” he said. “Ithink we have just seen the start of the gold bull market and there is stillplenty of value in the market.”
Gold To AttractSafe-Haven Demand
Along with real low rates supporting gold, Stoeferle saidthat he expects further uncertainty in equity markets to drive gold’ssafe-haven demand higher.
While equity markets have recovered from its recent flashcrash - the Dow Jones Industrial Average is seeing its best percentage gainssince November 2016 - Stoeferle said that the market is not out of the woodsyet as volatility is here to stay.
“This was only the first warning shot for equity marketsand that will continue to support gold,” he said.
Levels to watch
According to analysts, gold has serious bullish technicalmomentum as it broke a near-term head and shoulders pattern as prices pushedabove $1,354 an ounce. However, the market is forming double top with January’s1.5-year high. According to some analysts, the market needs to see a closeabove $1,362 an ounce to attracting more buyers.
The next significant target level would be the 2016 highat $1,376.
On the downside, Ahmad said that as long as gold pricesremain above $1,300 an ounce, the market is in an uptrend.
By Neils ChristensenFor Kitco News
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nchristensen@kitco.comwww.kitco.com Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.